No Estate Taxes for POD Beneficiary

Before James died (without a will, and with an estate valued at about $12 million) he had designated his teenage goddaughter, Jessica, as the beneficiary on two payable on death (POD) accounts worth almost $4 million at his death. Jessica and her parents were then sued by James’s estate, which was seeking reimbursement for the federal and state estate taxes that were attributable to the POD accounts.

A state supreme court ruled that Jessica had no obligation to pay any of the estate taxes. The starting point for the analysis was the general rule that the probate estate pays such federal estate taxes as may be generated by non-probate assets, such as life insurance proceeds, jointly held property, and POD accounts. An exception to this rule exists for transfers by the decedent during his lifetime with a retained life estate, but Jessica’s case did not come within that exception. A POD account transfers no property to the recipient during the decedent’s lifetime, since the depositor remains free to make changes in the account, or even to close it, at any time before his or her death. The result was the same for the claim based on state estate taxes.

A final argument directed at both Jessica and her parents, on a contractual theory, also failed. Jessica’s parents had signed a two sentence agreement with the estate to retain 50% of all sums payable on the POD accounts “for the purpose of paying required estate taxes.” This did not obligate Jessica or her parents to pay a portion of the estate taxes attributable to the accounts, since the accounts were not otherwise required by law to pay any estate taxes.

In short, there were no “required estate taxes,” as referred to in the agreement. Not only that, but Jessica, the only named recipient for the accounts, did not sign the agreement and was not a party to it, and the agreement did not suggest that Jessica’s parents were signing in any capacity other than for themselves.

Author: Mark Klein

Mark Klein has carefully created hundreds of living trust-based estate plans to carry out the recommendations he custom tailors to the specific needs of his clients. He also assists in the following related estate planning matters: Durable Powers of Attorney, Advance Healthcare Directives, Guardianships and Living Wills.